[Before starting this post, I’d like to thank Timothy Lee for his nice Vox.com post on the NGDP futures market project.]
I do sort of understand why people resist my claim that the Fed caused the Great Recession in the US. After all, I’m asking people to believe several highly implausible claims:
1. It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.
2. Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.
3. Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.
Although I must say it’s odd that these points are so implausible, after all, they are taken word for word from Frederic Mishkin’s textbook, which was the number one monetary textbook in the US back in 2008.
But here’s what really confuses me. You don’t even need to make these sorts of “implausible” claims to blame the ECB for the Great Recession (“Depression?) in the eurozone. I was thinking of this when I heard David Wessel explain the eurozone’s possible triple dip recession on NPR this morning. Basically he said (as far as I recall):
1. The 2008-09 eurozone recession was caused by the ripple effects of the US housing crisis.
2. The 2011-12 double-dip was caused by sovereign debt problems.
3. The current slowdown and possible triple dip is caused by Russia/Ukraine.
Wessel’s a fine reporter, and it’s his job to express the conventional wisdom. I have no doubt that he has done so. But this view seems preposterous to me, on all sorts of levels.
It is possible for real shocks to get transmitted via trade and/or financial channels, even with sound monetary policies. But even if the linkages are very close (as with the US and Canada), the secondary effects will be milder. And they were milder for Canada (and would have been still less pronounced if the BOC had targeted Canadian NGDP.) The eurozone is far less closely linked to the US than is Canada (which sends 70% of its exports to the US.) So the ripple effects should be much milder in the eurozone than Canada.
And even if you don’t buy anything I just said, there is a much bigger problem with the standard view. It completely ignores the fact that the 2008-09 NGDP plunge in Europe began earlier than in the US and was actually deeper (a bit over 4% vs. a bit over 3% in the US.)
But it’s even worse; the eurozone was already in recession in July 2008, and eurozone interest rates were relative high, and then the ECB raised them further. How is tight money not the cause of the subsequent NGDP collapse? Is there any mainstream AS/AD or IS/LM model that would exonerate the ECB? I get that people are skeptical of my argument when the US was at the zero bound. But the ECB wasn’t even close to the zero bound in 2008. I get that people don’t like NGDP growth as an indicator of monetary policy, and want “concrete steppes.” Well the ECB raised rates in 2008. The ECB is standing over the body with a revolver in its hand. The body has a bullet wound. The revolver is still smoking. And still most economists don’t believe it. ”My goodness, a central bank would never cause a recession, that only happened in the bad old days, the 1930s.”
For God’s sake, what more evidence do people need?
And then three years later they do it again. Rates were already above the zero bound in early 2011, and then the ECB raised them again. Twice. The ECB is now a serial killer. They had marched down the hall to another office, and shot another worker. Again they are again caught with a gun in their hand. Still smoking.
Meanwhile the economics profession is like Inspector Clouseau, looking for ways a sovereign debt crisis could have cause the second dip, even though the US did much more austerity after 2011 than the eurozone. Real GDP in the eurozone is now lower than in 2007, and we are to believe this is due to a housing bubble in the US, and turmoil in the Ukraine? If the situation in Europe were not so tragic this would be comical.
And now we have a third possible murder, although at least this time the revolver is not smoking (they didn’t raise rates–it was errors of omission.) Like the Pink Panther series of films, this story is beginning to move from classic comedy to utter farce.
(Whenever I do these posts I can’t get anyone to refute what I am saying. How could they? But they don’t accept it either.)
PS. Some commenters will always say; “if it’s monetary, how can Germany be booming?” As if supply-side factors can’t explain regional variation in a demand slump. In any case, German real GDP has risen by a grand total of 3% since the first quarter of 2008, vs. 7.5% in the US. If Germany is booming, how would you describe the US? And BTW, the recent monthly numbers look pretty good for the US, and horrible for Germany—they are the leading edge of the triple dip.
PPS. Is there any more confusing database than Eurostat? I’d expect more of the Iraqi central bank.